29–010

Calendar No. 425

108TH CONGRESS REPORT " ! SENATE 2d Session 108–221

PENSION STABILITY ACT 

JANUARY 9, 2004.—Ordered to be printed 

Filed, under authority of the order of the Senate of December 9, 2003

Mr. GREGG, from the Committee on Health, Education, Labor, and 

Pensions, submitted the following 

R E P O R T 

[To accompany S. 2005]

The Committee on Health, Education, Labor, and Pensions, reported an original bill (S. 2005) to temporarily replace the use by 

pension plans of the 30-year treasury bond rate with a composite 

corporate rate, and to establish a commission on defined benefit 

plans, having considered the same, reports favorably thereon without amendment and recommends that the bill do pass.

CONTENTS 

Page 

I. Purpose and summary of the legislation ..................................................... 1

II. Background and need for legislation ............................................................ 2

III. Legislative history and vote in committee ................................................... 2

IV. Explanation of bill and committee views ..................................................... 2

V. Cost estimate .................................................................................................. 5

VI. Application of law to the legislative branch ................................................ 9

VII. Regulatory impact statement ........................................................................ 9

VIII. Section-by-section analysis ............................................................................ 9

IX. Changes in existing law ................................................................................ 10

I. PURPOSE AND SUMMARY OF THE LEGISLATION

The purpose of this legislation is to provide a temporary replacement for the 30-year Treasury bond for determining funding liabilities of private sector pension plans, and to establish a blue-ribbon 

bipartisan commission to make recommendations for comprehensive pension reforms. The bill ensures that comprehensive reforms 

to the defined benefit system will be enacted by Congress prior to 

2

the end of the 3-year period by requiring Congress to act upon the 

commission’s recommendations within 120 days of their receipt. 

II. BACKGROUND AND NEED FOR LEGISLATION

Current funding and payout calculations for the defined benefit 

plans in the private sector are based on the 30-year Treasury bond 

that is no longer being issued. The low interest rate of this bond 

in recent years means employers must put more cash in their plans 

to satisfy full funding requirements. The poor performance of the 

stock market and recent economic downturn compound the problem, resulting in cash-starved companies having to divert capital 

away from development to fund their pension obligations. 

The current liability funding rules require the sponsor to use a 

specified mortality table and to calculate liabilities using an interest rate that is within a range of rates based upon the four-year 

weighted average of 30-year Treasury bonds. As amended in 1994, 

the permissible range is no lower than 90 percent of the 30-year 

bond average and no higher than 105 percent of the 30-year bond 

average. In March 2002, Congress enacted the Job Creation and 

Worker Assistance Act of 2002, Public Law 107–147, which created 

temporary funding relief for 2002 and 2003 only. A plan may use 

an interest rate of up to 120 percent of the 30-year bond average. 

Congress enacted this short term higher range in recognition of the 

fact that, as a result of the rise of budget surpluses followed by the 

decision of the Treasury to cease issuing 30-year bonds, the 30-year 

bond rate had dropped to levels that produced inflated calculations 

of pension liability. 

This higher statement of liabilities can require the diversion of 

hundreds of millions of dollars in a single company. Overstating liabilities is causing some employers to freeze, modify, or abandon 

their defined benefit plans, thus adversely impacting retirement security. 

The relief granted in JCWAA is set to expire at the end of 2003 

and the permissible range will revert to 105 percent of the 30-year 

Treasury bond rate. The low 30-year Treasury bond rate of recent 

years means that this reversion will cause many companies to divert cash from capital development, job growth, and critical employee benefits like health care insurance, to pension contributions, 

or to freeze or terminate their defined benefit plans. 

III. LEGISLATIVE HISTORY AND VOTE IN COMMITTEE

The Pension Stability Act was set before the committee as an 

original bill on October 15, 2003, and considered in executive session on October 29, 2003. A substitute, offered by Chairman Gregg, 

was agreed to without objection and the bill was approved by voice 

vote by the committee. 

IV. EXPLANATION OF BILL AND COMMITTEE VIEWS

The Pension Stability Act provides a responsible, immediate solution to the pension funding crisis facing the economy, while developing the glide path toward permanent defined benefit system 

funding improvements. It accomplishes these goals through three 

key components. 

3

REPLACEMENT RATE

The bill temporarily replaces the interest rate used for plan 

years beginning after December 31, 2003, and before January 1, 

2007, in determining current liability for funding and deduction 

purposes and in determining PBGC variable rate premiums. For 

these purposes, the provision replaces the interest rate on 30-year 

Treasury securities with the rate of interest on amounts conservatively invested in long-term corporate bonds. 

For purposes of determining a plan’s current liability for the relevant years of this temporary fix, the interest rate must be within 

a permissible range of the weighted average of the rates of interest 

on amounts conservatively invested in long-term, corporate bonds 

during the 4-year period ending on the last day before the plan 

year begins. The rate shall be determined by the Secretary of 

Labor, in consultation with the Secretary of the Treasury, through 

regulations on the basis of two or more indices of corporate bonds 

that are in the top two quality levels available reflecting average 

maturities of 20 years or more. Such indices shall be publicly available, published by established financial services firms, and based 

on publicly disclosed methodologies. The single interest rate prescribed by the Secretary’s regulation shall be based on the arithmetic average of such indices. 

The permissible range for these years is from 90 percent to 100 

percent. The Secretary of Labor is directed to publish the interest 

rate within the permissible range. 

In determining the amount of unfunded vested benefits for PBGC 

variable rate premium purposes for plan years beginning after December 31, 2003, and before January 1, 2007, the interest rate used 

is the annual yield on amounts invested in long-term corporate 

bonds for the month preceding the month in which the plan year 

begins, as determined by the Secretary of Labor, in consultation 

with the Secretary of the Treasury, on the basis of two or more indices of corporate bonds that are in the top two quality levels available reflecting average maturities of 20 years or more, selected periodically by the Secretary. The Secretary of Labor is directed to 

publish such annual yield. 

The Secretary of Labor, in consultation with the Secretary of the 

Treasury, is authorized to issue rules to implement the use of the 

rate of interest on amounts invested in conservative corporate 

bonds for purposes of the lookback rules. The committee is aware 

that making calculations of current liability for prior years can be 

difficult in cases where administrators have changed or where 

records are otherwise unavailable. Such rules may include simplifying assumptions for determining a plan’s current liability for 

years prior to the effective date. 

The committee anticipates that IRS Notice 90–11 will remain in 

effect throughout the duration of this legislation. That Notice clarifies that any interest rate within the corridor prescribed in ERISA 

and the Internal Revenue Code is deemed to be consistent with the 

assumptions that reflect the purchase rates that would be used by 

insurance companies to satisfy the liabilities under a plan upon 

plan termination. 

By adopting the composite corporate rate for this temporary relief, the committee does not close the debate on what interest rate 

4

benchmark is the most appropriate for the long-term stability of 

the defined benefit system. 

DURATION

The Pension Stability Act replaces the 30-year Treasury bond 

rate with the composite corporate bond rate based on conservative 

indices for a period of 3 years. This period of time is considered 

critical to ensure the stability of the pension system, and is the 

most appropriate duration for setting the stage for permanent and 

comprehensive reforms. 

In the view of the committee members, a shorter term solution, 

such as the current 2-year fix adopted in 2002, would only exacerbate the uncertainty that businesses and unions face in planning 

for the future. 

It is clear to most observers that 2 years will not be enough time 

to consider and enact the comprehensive reforms that are needed 

by the defined benefit system. Already, companies are departing 

from the system at an alarming rate. In 1983, there were more 

than 175,000 traditional defined benefit pension plans in the 

United States. This number has declined ever since and now 

stands at fewer than 35,000. Further piecemeal reforms will only 

increase the confusion and continue the decline in defined benefit 

plans. There is a consensus in Congress that all of the interrelated 

issues must be reconsidered and revised. These include the benchmarks for determining funding levels and liabilities, mortality tables, and many more issues. 

Already there are several new components of reform on the table 

that must be considered. For example, the Bush Administration 

has proposed a yield curve approach for determining plan liabilities. This is a novel approach that is not fully understood and its 

effects have not been fully analyzed. Its impact on companies with 

older workforces could be very severe. How a new funding regime 

will impact markets and what effect new accounting rules will have 

are perhaps even more problematic. Simply put, it will take more 

than 2 years to build the policy and political consensus for the 

broad range of reforms that are needed. 

Permanent changes to the pension system will require bipartisan 

cooperation and thorough, time-consuming analysis of innovative 

proposals. The Pension Stability Act takes into account these needs 

for a longer time period to resolve these complex issues by adopting 

a 3-year period for a temporary solution. 

The temporary interest rate relief adopted by JCWAA was intended to provide Congress with time to devise a permanent solution. However, Congress has not acted to do so; nor has the administration come forward with comprehensive reform proposals. The 

committee is concerned that another 2 years of funding relief will 

lead to yet another 2-year extension in 2005. While this may be 

convenient from a financial policy perspective, the impact on pension plans and employee benefits policy could be devastating. Companies are already fleeing from the defined benefit system because 

of cost, complexity and changing demographics. Adding uncertainty—as will be the case with periodic extenders—will only hasten the conversion to other benefits or no benefits programs. 

Finally, 3 years of temporary relief takes into account the realities of business planning cycles. Companies must meet long-term 

5

business planning goals—in order to obtain financing and to plan 

for future costs, they need as much information as early as possible 

about future pension funding obligations. Additionally, the timing 

of pension reforms will have a direct impact on labor relations because most collective bargaining agreements are at least 3 years in 

length. Three years of pension funding relief mirrors the terms of 

these agreements and provides greater certainty for employers and 

employees at the bargaining table. 

BI-PARTISAN BLUE RIBBON COMMISSION

The Pension Stability Act creates a Defined Benefit Plans Commission to review all outstanding issues, including all of the issues 

that the Bush Administration has put on the table, and report to 

Congress at the end of 2005. Members of the Commission, appointed by the President and chairmen and ranking members of 

the relevant committees in the Senate and House of Representatives, will be drawn from government, business, labor, and pension 

rights groups. The Blue Ribbon Commission demonstrates a clear 

commitment to responsible, comprehensive reform of the defined 

benefit system. Everything will be on the table at the Commission; 

all interested parties are expected to participate or be left out the 

solution. 

This commission is needed because too much money is at stake 

and the livelihood and security of too many Americans are at risk 

for these issues to be left purely to the political process. More importantly, however, is the view that these issues are too important, 

and the dollar figures too big, for an internal task force. Stakeholders in this debate include company financial and human resources officers, stock holders, pension plan participants and beneficiaries, unions, and financial markets. If they are not included in 

the process, they are more likely to oppose the proffered solutions. 

The Pension Stability Act ensures that the recommendations of 

the Blue Ribbon Commission are addressed by requiring congressional action within 120 days of the publication of the Commission’s report. This guarantees that comprehensive, responsible pension reforms will be on the House and Senate floor by April of 

2006. 

In summary, the Pension Stability Act solves the immediate 

problems of the pension system, while respecting the need for fiscal 

responsibility and ensuring that enactment of permanent solutions 

remains in the forefront of congressional attention. 

V. COST ESTIMATE

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, December 4, 2003. 

Hon. JUDD GREGG, 

Committee on Health Education, Labor, and Pensions, 

U.S. Senate, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for the Pension Stability Act. 

6

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Geoffrey Gerhardt. 

Sincerely, 

ELIZABETH M. ROBINSON

(For Douglas Holtz-Eakin, Director). 

Enclosure. 

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

Pension Stability Act 

Summary: The Pension Stability Act would make changes to the 

Employee Retirement Income Security Act of 1974 (ERISA) and the 

Internal Revenue Code that would affect the operations of private 

pension plans. Specifically, the bill would make changes to the way 

pension liabilities are calculated for certain pension plans, which 

would affect both pension contributions and premiums paid to the 

Pension Benefit Guaranty Corporation (PBGC). 

CBO and the Joint Committee on Taxation (JCT) estimate that 

enacting the bill would increase federal revenues by $4.9 billion 

over the 2004–2008 period and reduce revenues by $190 million 

over the 2004–2013 period. CBO estimates that the bill would increase direct spending by $367 million over the 2005–2013 period. 

In addition, CBO estimates the bill would increase spending subject to appropriation by $1 million annually over the 2004–2006 period, assuming appropriation of the necessary amounts. 

CBO has reviewed the non-tax provisions of the bill and determined that they contain no intergovernmental mandates as defined 

in the Unfunded Mandates Reform Act (UMRA). Those provisions 

also would impose no costs on state, local, or tribal governments. 

The bill would make changes to ERISA that would temporarily 

alter existing private-sector mandates related to the funding of private, defined-benefit pension plans. CBO estimates that the net effect of those provisions would be to reduce the direct cost of the 

mandates imposed by ERISA on plan sponsors. 

Estimated cost to the Federal Government: The estimated budgetary impact of the Pension Stability Act is shown in the following 

table. The costs of this legislation would fall within budget function 

600 (income security).

By fiscal year, in millions of dollars—

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

CHANGES IN REVENUES

Estimated Revenues ............ 2,719 3,636 1,137 ¥1,026 ¥1,566 ¥480 ¥1,136 ¥1,620 ¥1,045 ¥809

CHANGES IN DIRECT SPENDING

Estimated Budget Authority 0 132 102 82 26 25 0 0 0 0

Estimated Outlays ............... 0 132 102 82 26 25 0 0 0 0

CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Estimated Authorization 

Level ................................ 1 1 1 0 0 0 0 0 0 0

Estimated Outlays ............... 1 1 1 0 0 0 0 0 0 0

Sources: Congressional Budget Office and Joint Committee on Taxation. 

Basis of estimate: For the purposes of this estimate, CBO and 

JCT assume the bill will be enacted early in 2004. 

7

Revenues 

The bill would temporarily replace the interest rate used in determining pension funding and variable-rate premiums paid to the 

PBGC. Under current law, such liabilities and premiums are determined using the interest rate on 30-year Treasury securities. The 

bill would replace that rate through December 31, 2006, with the 

rate of interest on amounts conservatively invested in long-term 

corporate bonds. Because this change would reduce the contributions sponsors would have to make toward their pension plans, taxable profits would increase and yield higher tax receipts. JCT estimates that the bill would increase federal revenues by $2.7 billion 

in 2004 and by $4.9 billion over the 2004–2008 period; it would reduce revenues by an estimated $190 million over the 2004–2013 period. 

Direct Spending 

Temporary Replacement of the 30-Year Bond Rate. Under current law, pension plans are required to determine whether they are 

fully funded by discounting future pension liabilities using the interest rate based on the moving four-year average for 30-year 

Treasury bonds. Sponsors of plans that are considered underfunded 

must make contributions to their plans in addition to paying variable-rate premiums to the PBGC based on the amount of underfunding. The Pension Stability Act would allow plans to use interest rates on high-grade, long-term corporate bonds to discount their 

liabilities during plan years 2004, 2005, and 2006. The exact rate 

to be used by plans would be determined by the Secretary of the 

Treasury. 

Interest rates on corporate bonds are generally higher than those 

on Treasury bonds. Using a higher interest rate to discount liabilities results in lower projections of the cost of future liabilities. 

Therefore, firms would have to contribute less to their plans and 

pay less in variable-rate premiums. Based on information provided 

by the PBGC, CBO assumes that the applicable corporate bond 

rate would be roughly 150 basis points higher than the interest 

rate on 30-year Treasury bonds. CBO estimates that using this 

higher rate to discount liabilities would reduce the liabilities of underfunded plans by about $30 billion by plan-year 2007. As a result, we estimate that premium receipts would decrease by $367 

million, or 4.7 percent, over the 2005–2013 period. Because the 

PBGC’s premiums are offsetting collections to a mandatory spending account, reductions in premium receipts are reflected as increases in direct spending. 

The use of higher interest rates could have other effects on the 

PBGC’s costs, but the direction and magnitude of these effects are 

uncertain. On the one hand, the use of higher interest rates to discount future liabilities would reduce sponsors’ contributions, improve their financial position, and make it less likely that they 

would eventually become bankrupt. Thus, the policy might reduce 

the number of plans that the PBGC ultimately takes over. On the 

other hand, the lower contributions would mean that the underfunding for plans that eventually become the responsibility of the 

PBGC would be greater, thus adding to the agency’s costs. 

8

Spending Subject to Appropriation 

The legislation would establish a commission designed to study 

issues related to defined-benefit pension plans and issue a report 

by December 31, 2005. The commission would be composed of 11 

representatives from the executive and legislative branches, plus 

two members of the public appointed by the President. Commission 

members would not be compensated for their work, but travel and 

other expenses would be paid for by various government agencies. 

Based on the experience of other commissions of similar scope, 

CBO judges that this provision would cost about $1 million annually over the 2004–2006 period.

Estimated impact on state, local, and tribal governments: CBO 

has reviewed the non-tax provisions of the bill and determined that 

they contain no intergovernmental mandates as defined in UMRA. 

Those provisions also would impose no costs on state, local, or tribal governments. 

Estimated impact on the private sector: The bill would make 

changes to ERISA that would temporarily alter existing privatesector mandates related to the funding of private, defined-benefit 

pension plans. Changing the interest rate required to be used by 

plans to determine the present value of their pension obligations 

would reduce the direct cost of the mandates now imposed by 

ERISA on sponsors of pension plans. 

Previous CBO estimates: On November 21, 2003, CBO transmitted a cost estimate for H.R. 3108, the Pension Funding Equity 

Act of 2003, as passed by the House of Representatives on October 

8, 2003. H.R. 3108 would replace the 30-year Treasury rate with 

a corporate bond rate for a period of two years (plan-years 2004 

and 2005), rather than the three-year period specified by the Pension Stability Act. CBO estimated that H.R. 3108 would decrease 

premium receipts by $279 million over the 2005–2013 period and 

increase revenues by $304 million over the 2004–2013 period. 

On November 18, 2003, CBO transmitted a cost estimate for H.R. 

1776, the Pension Preservation and Savings Expansion Act of 2003, 

as ordered reported by the House Committee on Ways and Means. 

H.R. 1776 contained various pension reform proposals, including a 

provision to replace the 30-year Treasury bond rate with a corporate bond rate for three years, the same period of time provided 

by the Pension Stability Act. CBO estimated that this provision of 

H.R. 1776 would decrease premium receipts by $469 million over 

the 2005–2013 period. The estimate for the Pension Stability Act 

differs from that for H.R. 1776 because CBO revised the methodology it used to determine premium receipts once the Treasury rate 

is reinstated. 

Estimate prepared by: Federal Revenues: Annabelle Bartsch; 

Federal Outlays: Geoffrey Gerhardt; Impact on State, Local, and 

Tribal Governments: Leo Lex; and Impact on the Private Sector: 

Daniel Wilmoth. 

Estimate approved by: Robert A. Sunshine, Assistant Director for 

Budget Analysis and G. Thomas Woodward, Assistant Director for 

Tax Analysis.

9

VI. APPLICATION OF LAW TO THE LEGISLATIVE BRANCH

The bill amends laws that apply only to private pension plans 

and does not apply to the legislative branch. 

VII. REGULATORY IMPACT STATEMENT

The Pension Stability Act would make changes to the Employee 

Retirement Income Security Act of 1974 (ERISA) and the Internal 

Revenue Code that would affect the operations of private pension 

plans. The committee has determined the regulatory impact of 

these changes to be minimal. 

VIII. SECTION-BY-SECTION ANALYSIS

Section 1. Title 

The bill provides that it may be cited at the ‘‘Pension Stability 

Act.’’

Section 2. Temporary replacement of interest rate on 30-year Treasury securities with interest rate on conservatively invested longterm corporate bonds 

The legislation makes several changes to the Employee Retirement Income Security Act and the Internal Revenue Code of 1986 

to replace the 30-year Treasury bond rate with a composite corporate rate as the benchmark for determining certain pension obligations. The bill creates a special rule for the years 2004, 2005, and 

2006, during which the permissible range of interest rates and 

benchmark for determining current liabilities are different from 

current law. The permissible range is defined during this threeyear period as 90 percent to 100 percent of the new benchmark. 

The new benchmark shall be the weighted average of the conservative long-term corporate bond rates during the four-year period ending on the last day before the beginning of the plan year. 

The Secretary of Labor, in consultation with the Secretary of the 

Treasury, is directed to determine the rate through regulations on 

the basis of two or more indices that are in the top two quality levels available reflecting average maturities of 20 years or more. 

The bill makes conforming amendments to repeal out-of-date 

lookback rules and clarifies that the appropriate rate in 2007 shall 

be 105 percent of the 30-year Treasury bond rate. 

The bill extends the special rule for 2004, 2005, and 2006, for determining the interest rate for PBGC variable rate premiums in 

Section 4006(a)(3)(E)(iii) of ERISA. 

Finally, in adjusting a benefit in a form other than a straight life 

annuity for purposes of determining the annual benefit limit of a 

defined benefit plan under IRC Section 415(b)(2)(E)(ii), the interest 

rate is changed from 5 percent to 5.5 percent. 

Section 3. Commission on defined pension benefit plans 

The legislation establishes a 13-member bipartisan blue-ribbon 

commission to consider reforms to the defined benefit system and 

to make recommendations to Congress. Membership in the commission includes the Secretaries of Labor and the Treasury, and the 

Director of the Pension Benefit Guaranty Corporation, or their designees, two members of the general public selected by the PresiVerDate jul 14 2003 03:51 Jan 10, 2004 Jkt 029010 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\SR221.XXX SR221
10

dent, and one member each selected by the chair and ranking 

member of the Senate Health, Education, Labor, and Pensions 

Committee, the Senate Finance Committee, the House Education 

and the Workforce Committee, and the House Ways & Means Committee. 

The scope of the commission purview is broad, but clearly delineated. Among the commission’s specific areas of inquiry are the following: How to reform the defined benefit funding and liability 

rules, the appropriate interest rates for valuing plan liabilities, 

variable rate premiums, lump sum distributions, the impact of reforms on investment policy and capital markets, appropriate mortality assumptions, including collar adjustments, appropriate transition protections and the need to avoid volatility, and how to create incentives and avoid disincentives to the creation and expansion of defined benefit plans. 

The commission is empowered to conduct public hearings, receive 

testimony, and make comprehensive legislative proposals. It must 

report its findings and recommendations to Congress by December 

31, 2005. 

Section 4. Congressional action 

The bill provides that Congress must act on the recommendations of the defined benefit commission within 120 days after receipt of the commission’s report. 

Section 5. Effective dates 

In general, the amendments in the legislation providing a temporary replacement interest rate become effective for plan years beginning after December 31, 2003. 

For purposes of applying certain rules (‘‘lookback rules’’) to plan 

years beginning after December 31, 2003, the amendments made 

by the provisions may be applied as if they had been in effect for 

all years beginning before the effective date. For purposes of the 

provision, ‘‘lookback rules’’ means: (1) the rule under which a plan 

is not subject to the additional funding requirements for a plan 

year if the plan’s funding current liability percentage was at least 

90 percent for each of the two immediately preceding plan years or 

each of the second and third immediately preceding plan years; and 

(2) the rule under which quarterly contributions are required for a 

plan year if the plan’s funded current liability percentage was less 

than 100 percent for the preceding plan year. The amendments 

made by the provision may be applied for purposes of the lookback 

rules, regardless of the funded current liability percentage reported 

for the plan on the plan’s annual reports (i.e., Form 5500) for preceding years. 

A one-year transition rule is provided to ensure that no person 

shall receive a lesser amount due to the change in prescribed interest rate under IRC Section 415. 

Finally, amendments made by the legislation shall not apply to 

plan years beginning after December 31, 2006. 

IX. CHANGES IN EXISTING LAW

In compliance with rule XXVI paragraph 12 of the Standing 

Rules of the Senate, the following provides a print of the statute 

or the part or section thereof to be amended or replaced (existing 

11

law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, existing law in which no change is proposed 

is shown in roman.) 

EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 

1974

* * * * * * *

PENSION STABILITY ACT 

* * * * * * *

Subchapter I—Protection of Employee Benefit Rights 

* * * * * * *

Subtitle B—Regulatory Provisions 

* * * * * * *

Part 5—Administration and Enforcement 

* * * * * * *

519. Commission on Defined Pension Benefit Plans. 

* * * * * * *

MINIMUM FUNDING STANDARDS

SEC. 302. (a)(1) * * *

* * * * * * *

(b) * * *

* * * * * * *

(5) * * *

* * * * * * *

(B) * * *

* * * * * * *

(ii) * * *

(I) IN GENERAL.—Except as provided in subclause (II) or (III), the term ‘‘permissible range’’

means a rate of interest which is not more than 

10 percent above, and not more than 10 percent 

below, the weighted average of the rates of interest on 30-year Treasury securities during the 4-

year period ending on the last day before the beginning of the plan year.

(II) SPECIAL RULE FOR YEARS 2004, 2005, AND

2006.—In the case of plan years beginning after December 31, 2003, and before January 1, 2007, the 

term ‘‘permissible range’’ means a rate of interest 

which is not above, and not more than 10 percent 

below, the weighted average of the conservative 

long-term corporate bond rates during the 4-year 

period ending on the last day before the beginning 

of the plan year. The Secretary, in consultation 

with the Secretary of the Treasury, shall, by regulation, prescribe a method for periodically determining conservative long-term bond rates for purVerDate jul 14 2003 05:15 Jan 10, 2004 Jkt 029010 PO 00000 Frm 00011 Fmt 6659 Sfmt 6603 E:\HR\OC\SR221.XXX SR221
12

poses of this subclause. Such rates shall reflect the 

rates of interest on amounts conservatively invested in long-term corporate bonds and shall be 

based on the use of 2 or more indices that are in 

the top 2 quality levels available reflecting average 

maturities of 20 years or more.

ø(II)¿ (III) SECRETARIAL AUTHORITY.—If the Secretary finds that the lowest rate of interest permissible under subclause (I) or (II) is unreasonably high, the Secretary may prescribe a lower 

rate of interest, except that such rate may not be 

less than 80 percent of the average rate determined under øsubclause (I)¿ such subclause. 

* * * * * * *

(d) * * *

* * * * * * *

(7) * * *

* * * * * * *

(C) * * *

(i) * * *

* * * * * * *

(IV) SPECIAL RULE FOR 2004, 2005, AND 2006.—For 

plan years beginning in 2004, 2005, or 2006, notwithstanding subclause (I), the rate of interest 

used to determine current liability under this subsection shall be the rate of interest under subsection (b)(5). 

* * * * * * *

(e) * * *

(1) * * *

* * * * * * *

ø(7) SPECIAL RULES FOR 2002 AND 2004.—In any case in which 

the interest rate used to determined current liability is determined under subsection (d)(7)(C)(i)(III)—

ø(A) 2002.—For purposes of applying paragraphs (1) and 

(4)(B)(ii) for plan years beginning in 2002, the current liability for the preceding plan year shall be redetermined 

using 120 percent as the specified percentage determined 

under subsection (d)(7)(C)(i)(II). 

ø(B) 2004.—For purposes of applying paragraphs (1) and 

(4)(B)(ii) for plan years beginning in 2004, the current liability for the preceding plan year shall be redetermined 

using 105 percent as the specified percentage determined 

under subsection (d)(7)(C)(i)(II).¿

(7) SPECIAL RULE FOR 2007.—For purposes of applying paragraphs (1) and (4)(B)(ii) for plan years beginning in 2007, current liability for the preceding plan year shall be redetermined 

using 105 percent of the annual rate of interest on 30-year 

Treasury securities for such preceding plan year as the specific 

percentage determined under subsection (d)(7)(C)(i)(II). 

* * * * * * *

13

PART 5—ADMINISTRATION AND ENFORCEMENT 

* * * * * * *

SEC. 519. COMMISSION ON DEFINED PENSION BENEFIT PLANS. 

(a) ESTABLISHMENT OF THE COMMISSION.— (1) ESTABLISHMENT.—There is established, subject to the Federal Advisory Committee Act, the Commission on Defined Benefit Pension Plans (in this section referred to as the ‘‘Commission’’). 

(2) MEMBERSHIP.—The Commission shall be composed of 13 

members of whom— (A) 1 shall be the Secretary or their designee; 

(B) 1 shall be the Secretary of the Treasury or their designee; 

(C) 1 shall be the Executive Director of the Pension Benefit Guaranty Corporation or their designee; 

(D) 2 shall be appointed by the President from among 

members of the general public; 

(E) 1 shall be appointed by the chairman of the Committee on Health, Education, Labor, and Pensions of the 

Senate; 

(F) 1 shall be appointed by the ranking minority member 

of the Committee on Health, Education, Labor, and Pensions of the Senate; 

(G) 1 shall be appointed by the chairman of the Committee on Finance of the Senate; 

(H) 1 shall be appointed by the ranking minority member 

of the Committee on Finance of the Senate; 

(I) 1 shall be appointed by the chairman of the Committee on Education and the Workforce of the House of Representatives; 

(J) 1 shall be appointed by the ranking minority member 

of the Committee on Education and the Workforce of the 

House of Representatives; 

(K) 1 shall be appointed by the chairman of the Committee on Ways and Means of the House of Representatives; 

and 

(L) 1 shall be appointed by the ranking minority member 

of the Committee on Ways and Means of the House of Representatives. 

(3) PERIOD OF APPOINTMENT; VACANCIES.—Members shall be 

appointed for the life of the Commission. Any vacancy in the 

Commission shall not affect its powers, but shall be filled in the 

same manner as the original appointment. 

(4) QUORUM.—A majority of the members of the Commission 

shall constitute a quorum, but a lesser number of members may 

hold hearings. 

(5) CHAIRPERSON AND VICE CHAIRPERSON.—The Commission 

shall select a Chairperson and Vice Chairperson from among 

its members. 

(b) DUTIES OF THE COMMISSION.—

(1) STUDY AND RECOMMENDATIONS.—The Commission shall 

conduct a thorough study of, and shall develop recommendations on, the following issues relating to defined benefit pension 

plans: 

14

(A) How to reform the defined benefit pension plan funding rules to increase participants’ benefit security, provide 

rational and predictable funding rules for employers, and 

protect the financial independence of the Pension Benefit 

Guaranty Corporation. 

(B) The relevance and effectiveness of the current liability 

rules, and, if such rules are maintained, an analysis of alternative valuation measures for those rules, including the 

rationale for the measures as well as their strengths and 

weaknesses. 

(C) The appropriate interest rates that should be used in 

valuing plan liabilities, the variable rate premium, and 

lump-sum benefits, including whether the rates proposed 

are transparent, widely understood, publicly available, and 

resistant to manipulation. 

(D) Whether the recommended interest rate would impact 

the investment policy of the pension trust along with an 

analysis of the impact on capital markets, the cost of maintaining a pension plan over the long term, and the compatibility of any effect on investment policy with the fiduciary 

requirements to diversify investments under this Act. 

(E) The appropriate mortality assumptions that should 

be used in valuing plan liabilities. 

(F) whether such assumptions should contain a collar adjustment or should otherwise be adjusted to reflect the 

workforce covered by the plan. 

(G) A consideration of other actuarial assumptions used 

in valuing plan liabilities. 

(H) Whether the same interest rate should be used for 

purposes of both funding and lump sum benefits, including 

consideration of the effect on plan funding and other purposes for which the interest rate is used if such rate is different for those purposes. 

(I) The effect of the interest rate on participants’ decisions 

whether to elect lump sum benefits. 

(J) The appropriate means of providing transition protection to participants in the event changes are enacted. 

(K) Whether the same interest rate used for funding purposes should also apply for other purposes for which the 

rate of interest on 30-year Treasury securities is currently 

used. 

(L) The need to avoid volatile funding obligations and 

how to reform the law to avoid such volatility, including 

volatility attributable to the recent downturn in the equity 

markets and significant decrease in interest rates. 

(M) The need for predictability, simplicity, and transparency with respect to the calculation of funding obligations, and how to reform the law to achieve such goals. 

(N) Effective means that would provide for additional 

funding in favorable economic periods, so that funding levels can withstand market downturns without requiring 

large contributions during adverse economic conditions. 

(O) How to design transition rules so that funding reforms do not cause short-term hardships for employers or 

employees. 

15

(P) How to ensure that revisions to funding obligations 

do not discourage employers from maintaining pension 

plans. 

(Q) How to ensure that required disclosure of funding information is material and relevant without requiring disclosures that impose disclosure requirements that are unnecessarily burdensome, are misleading with respect to the 

funded status of an ongoing plan, or are not adjusted to reflect the size of the plan. 

(R) Other funding and benefit reforms that would promote the creation and expansion of defined benefit plans. 

(2) REPORT.—Not later than December 31, 2005, the Commission shall submit a report to the appropriate committees of Congress containing a detailed statement of the findings and conclusions of the Commission, together with the recommendations 

for such legislation as it considers appropriate (including proposed legislative language to implement the recommendations). 

(c) POWERS OF THE COMMISSION.—

(1) HEARINGS.—The Commission may hold such hearings, sit 

and act at such times and places, take such testimony, and receive such evidence as the Commission considers advisable to 

carry out this section. The Commission shall, to the maximum 

extent possible, use existing data and research prior to holding 

such hearings. 

(2) INFORMATION FROM FEDERAL AGENCIES.—The Commission 

may secure directly from any Federal department or agency 

such information as the Commission considers necessary to 

carry out this section. Upon request of the Chairperson of the 

Commission, the head of such department or agency shall furnish such information to the Commission. 

(3) POSTAL SERVICES.—The Commission may use the United 

States mails in the same manner and under the same conditions as other departments and agencies of the Federal Government. 

(d) COMMISSION PERSONNEL MATTERS.—

(1) COMPENSATION; TRAVEL EXPENSES.—Each member of the 

Commission shall serve without compensation but shall be allowed travel expenses, including per diem in lieu of subsistence, 

at rates authorized for employees of agencies under subchapter 

I of chapter 57 of title 5, United States Code, while away from 

their homes or regular places of business in the performance of 

services for the Commission. 

(2) STAFF AND EQUIPMENT.—The Pension Benefit Guaranty 

Corporation shall provide all financial, administrative, and 

staffing requirements for the Commission, including—

(A) office space; 

(B) furnishings; and 

(C) equipment. 

(e) TERMINATION OF THE COMMISSION.—The Commission shall 

terminate 180 days after the date on which the Commission submits 

its report under subsection (b)(2). 

* * * * * * *

16

Subchapter III—Plan Termination Insurance 

Subtitle A—Pension Benefit Guaranty 

Corporation 

SEC. 1306. PREMIUM RATES. 

(a) SCHEDULES FOR PREMIUM RATES AND BASES FOR APPLICA- TION; ESTABLISHMENT, COVERAGE, ETC.— (1) * * *

* * * * * * *

(3)(A) * * *

* * * * * * *

(E)(i) * * *

* * * * * * *

(iii) * * *

(I) * * *

* * * * * * *

(V) In the case of plan years beginning after December 

31, 2003, and before January 1, 2007, the annual yield 

taken into account under subclause (II) shall be the annual 

yield determined by the Secretary on amounts conservatively invested in long-term corporate bonds for the month 

preceding the month in which the plan year begins. For 

purposes of the preceding sentence, the Secretary, in consultation with the Secretary of the Treasury, shall, by regulation, prescribe a method for periodically determining conservative long-term bond rates. Such rates shall reflect the 

rates of interest on amounts conservatively invested in longterm corporate bonds and shall be based on the use of 2 or 

more indices that are in the top 2 quality levels available 

reflecting average maturities of 20 years or more.

INTERNAL REVENUE CODE 

SEC. 412. MINIMUM FUNDING STANDARDS. 

(a) GENERAL RULE.— ***

(b) * * *

* * * * * * *

(5) * * *

* * * * * * *

(B) * * *

* * * * * * *

(ii) * * *

(I) IN GENERAL.—Except as provided in subclause (II) or (III), the term ‘‘permissible range’’

means a rate of interest which is not more than 

10 percent above, and not more than 10 percent 

below, the weighted average of the rates of interest on 30-year Treasury securities during the 4-

17

year period ending on the last day before the beginning of the plan year.

(II) SPECIAL RULE FOR 2004, 2005, AND 2006.—In 

the case of plan years beginning after December 

31, 2003, and before January 1, 2007, the term 

‘‘permissible range’’ means a rate of interest which 

is not above, and not more than 10 percent below, 

the weighted average of the conservative long-term 

corporate bond rates during the 4-year period ending on the last day before the beginning of the plan 

year. The Secretary of Labor, in consultation with 

the Secretary, shall, by regulation, prescribe a 

method for periodically determining conservative 

long-term bond rates for purposes of this paragraph. Such rates shall reflect the rates of interest 

on amounts conservatively invested in long-term 

corporate bonds and shall be based on the use of 

2 or more indices that are in the top 2 quality levels available reflecting average maturities of 20 

years or more.

ø(II)¿ (III) SECRETARIAL AUTHORITY.—If the Secretary finds that the lowest rate of interest permissible under subclause (I) or II is unreasonably 

high, the Secretary may prescribe a lower rate of 

interest, except that such rate may not be less 

than 80 percent of the average rate determined 

under øsubclause (I)¿ such subclause. 

* * * * * * *

(l) ADDITIONAL FUNDING REQUIREMENTS FOR PLANS WHICH ARE

NOT MULTIEMPLOYER PLANS.—

(7) * * *

* * * * * * *

(C) * * *

(i) * * *

(I) * * *

(IV) SPECIAL RULE FOR 2004, 2005, AND 2006.—For 

plan years beginning in 2004, 2005, or 2006, notwithstanding subclause (I), the rate of interest 

used to determine current liability under this subsection shall be the rate of interest under subsection (b)(5). 

* * * * * * *

(m) QUARTERLY CONTRIBUTIONS REQUIRED.—

(1) IN GENERAL.— ***

* * * * * * *

ø(7) SPECIAL RULES FOR 2002 AND 2004.—In any case in which 

the interest rate used to determine current liability is determined under subsection (l)(7)(C)(i)(III)—

ø(A) 2002.—For purposes of applying paragraphs (1) and 

(4)(B)(ii) for plan years beginning in 2002, the current liability for the preceding plan year shall be redetermined 

using 120 percent as the specified percentage determined 

under subsection (l)(7)(C)(i)(II). 

18

ø(B) 2004.—For purposes of applying paragraphs (1) and 

(4)(B)(ii) for plan years beginning in 2004, the current liability for the preceding plan year shall be redetermined 

using 105 percent as the specified percentage determined 

under subsection (l)(7)(C)(i)(II).¿

(7) SPECIAL RULE FOR 2007.—For purposes of applying paragraphs (1) and (4)(B)(ii) for plan years beginning in 2007, current liability for the preceding plan year shall be redetermined 

using 105 percent of the annual rate of interest on 30-year 

Treasury securities for such preceding plan year as the specific 

percentage determined under subsection (l)(7)(C)(i)(II).

SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTION UNDER 

QUALIFIED PLANS. 

(a) GENERAL RULE.—

* * * * * * *

(b) * * *

* * * * * * *

(2) * * *

* * * * * * *

(E) * * *

* * * * * * *

(ii) For purposes of adjusting any benefit under subparagraph (B) for any form of benefit subject to section 

417(e)(3), øthe applicable interest rate (as defined in 

section 417(e)(3))¿ 5.5 percent shall be substituted for 

‘‘5 percent’’ in clause (i). 

* * * * * * *

Æ